Can Personality Type Explain Heterogeneity in Probability Distortions?

Abstract

There are two regularities we have learned from experimental studies of choice under risk. The first is that the majority of people weigh objective probabilities non-linearly. The second regularity, although less commonly acknowledged, is that there is a large amount of heterogeneity in how people distort probabilities. Despite of this, little effort has been made to identify the source of heterogeneity. In this paper, we explore the possibility that the probability distortions are linked to the personality profile of the decision maker. Using four widely utilized personality tests, we classify participants into three distinct personality types and find that these types have different risk characteristics. Particularly, the trait of motivation plays a role in explaining the attraction of gambling, while the trait of impulsiveness affects the discriminability of non-extreme probabilities. Our results suggest heterogeneity in probability distortions may be explained by personality profiles, which can be elicited though standard questionnaires.

Keywords: Choice under Risk, Personality, Experiments, Probability Weighting Function

JEL Classification: D03, C91, C83